How a Citigroup Blunder and a Texas Blackout Are Similar

Last August, Citigroup accidentally wired a $900 million payback to some lenders. Now, Texas is experiencing catastrophic power outages and water shortages.

Both could be similar.

Outdated Infrastructure

Citigroup

Our story starts in 2016 with a cosmetics company that needed money. Borrowing the cash, Revlon used its subsidiaries as collateral. Then, several years later, it tried to re-use the same collateral. Suing, the original lenders protested. Through it all, Citigroup administered their interest payments. And that was the problem. Citigroup’s interest paying software was outdated and easily misunderstood. When a Citi employee assumed the interest had been sent, instead the software wired the $900 million principal. For now, a judge said it was okay for the recipients to keep it.

Texas

Because Texas rarely has a cold snap, its power generating grid is geared for warm weather. So, when subfreezing temperatures hit, they were unprepared. Many people had no heat, pipes froze, and the lights went out. Roads remained unplowed. Because Texas generates most of its own power, it decides whether to weatherize the state’s gas-fired plants and wind turbines. It can mandate insulated pipelines, new building codes, more storage capability. But they never did.

Our Bottom Line: Opportunity Cost

Both Citibank and Texas had an opportunity cost crisis. Defined as the next best alternative, the opportunity cost of a decision is what you sacrifice. Both Citibank and Texas could have updated their outdated infrastructure. But they did not. For each, the money and upset required by an upgrade was too great a sacrifice. They preferred to use the resources elsewhere because a rare event–a “six sigma”–was so unlikely.

So, if you are asked about spending money to upgrade your software because you could make a $1 billion mistake or be hit by a once in a lifetime storm, you can say the opportunity cost is not worth it. You can allocate your time and money elsewhere. At the time, the decision made sense…

Until it didn’t.

My sources and more: Slate’s Money podcast started me thinking about the Citigroup loan and the Texas catastrophe. Then, for more background on the Citi saga, WSJ had the facts here and here. For Texas, I recommend reading The Christian Science Monitor. (Our featured image is from WSJ.)